As-Is Language In Sales Literature Defeats Fraud Claim Involving ’67 Corvette (Updated April 2017)

In late March 2017, a Federal court in Illinois granted summary judgment for a luxury car auctioneer in a disgruntled buyer’s lawsuit premised on a claimed fake Corvette.

The Corvette aficionado plaintiff in Pardo v. Mecum Auction, Inc., 2017 WL 1217198 alleged the auction company misrepresented that a cobbled-together 1964 Corvette was a new 1967 Corvette – the vehicle plaintiff thought he was buying.  Plaintiff’s suit sounded in common law fraud and breach of contract.  The Court previously dismissed the fraud suit and later granted summary judgment for the defendant on the plaintiff’s breach of contract claim.

The Court dismissed the fraud suit based on “non-reliance” and “as-is” language in the contract.  Since reliance is a required fraud element, the non-reliance clause preemptively gutted the plaintiff’s fraud count.

Denying the plaintiff’s motion to reconsider, the Court noted that an Illinois fraud claimant cannot allege he relied on a false statement when the same writing provides he’s buying something in as-is condition.  The non-reliance/as-is disclaimer also neutralizes a fraud claim based on oral statements and defeats breach of express and implied warranty claims aimed at misstatements concerning a product.

By attaching the contract which contained the non-reliance language, the plaintiff couldn’t prove his reliance as a matter of law.

The Court found for the defendant on plaintiff’s breach of contract claim.  The plaintiff’s operative Second Amended Complaint alleged the auction company breached a title processing section of the contract: that it failed to timely deliver title to the vehicle to the plaintiff.

The Court sided with the auction company based on basic contract interpretation rules.  All the contract required was that the defendant “process” the title within 14 business days of the sale.  It didn’t saddle the defendant with an obligation to deliver the title to a specific person.  Since the evidence in the record revealed that the defendant did process and transfer the title to a third party within the 14-day time frame, plaintiff could not prove that defendant breached the sales contract.

The plaintiff also couldn’t prove damages – another indispensable breach of contract element.  That is, even if the auction company failed to process the title, the plaintiff didn’t show that it suffered any damages.  The crux of the plaintiff’s lawsuit was that it was sold a car that differed from what was advertised.  Whether the defendant complied with the 14-day title processing requirement had nothing to do with plaintiff’s alleged damages.

Since the plaintiff could not offer evidence to support its breach and damages components of its breach of contract action, the Court granted summary judgment for the defendant.

Lastly, the Court rejected plaintiff’s rescission remedy argument – that the contract should be rescinded for defendant’s fraud and failure to perform.

The Court’s ruling that the defendant performed in accordance with the title processing language defeated plaintiff’s nonperformance argument.  In addition, the Court prior dismissal of the plaintiff’s fraud claim based on the contractual non-reliance language knocked out the rescission-based-on-fraud argument.

 

Afterwords:

Non-reliance or “as is” contract text will make it hard if not impossible to allege fraud in connection with the sale of personal property;

A breach of contract carries the burden of proof on both breach and damages elements.  The failure to prove either one is fatal to a breach of contract claim.

In hindsight, the plaintiff should have premised its breach of contract claim on the defendant’s failure to deliver a car different from what was promoted. This arguably would have given the plaintiff a “hook” to keep its breach of contract suit alive and survive summary judgment.

 

Trump Tower Condo Buyer’s Bait-and-Switch Claim Defeated – Seventh Circuit

The Seventh Circuit recently affirmed the District Court’s trial verdict in favor of some Trump-controlled entities in a consumer fraud suit filed by a purchaser of some Trump Tower condominium units. 

In Goldberg v. 401 North Wabash Investor, LLC, 2014 WL 2579939 (7th Cir. 2014), an eighty-something real estate investor sued on a bait-and-switch theory after a condominium developer unilaterally removed certain hotel facilities from the project’s common elements before the closing. 

She sued for consumer fraud, breach of contract, violation of the Illinois Condominium Property Act and filed another count under Illinois securities law.  After a trial, a jury returned a verdict in the seller’s favor and in a later bench trial, the court found for the seller on the plaintiff’s breach of contract and Condominium Act claims.  The plaintiff appealed.

Held: Affirmed

Reasons:

The Seventh Circuit upheld the jury’s verdict for the seller on the plaintiff’s consumer fraud count.  The plaintiff’s case centered on the seller’s removal of certain hotel facilities from the common elements pursuant  to a “change clause” in the underlying sale documents.

The sale documents’ change clause gave the seller complete discretion to modify any condominium documents.

When the seller removed the hotel facilities (food and beverage operations, meeting rooms and certain health club use), the plaintiff sought return of the approx. $500K in earnest money she paid.  The seller said no and plaintiff sued.

Consumer Fraud: Bait-and-Switch

Plaintiff’s consumer fraud claim alleged classic bait-and-switch: where a seller promotes a specific product knowing that he won’t sell it.  Instead, the customer shows up, the seller tells him the product is sold out and the seller pulls a “switch” – he tries to get the unwitting consumer to pay a higher price for a different product.

The Court found that the jury could properly find there was no bait-and-switch.  The condominium sale documents clearly allowed the seller to make changes to the condo common elements at its sole discretion.

So, by the seller telegraphing to a buyer (like plaintiff) that it had an unqualified right to modify the common elements, there was no bait-and-switch.  The plaintiff, an experienced real estate investor, was essentially on notice that the seller could amend the declaration at any time.

Breach of Contract – Why No Jury?

On the plaintiff’s breach of contract count, the Seventh Circuit agreed with the District Court that plaintiff wasn’t entitled to a jury trial.  The Court looked beyond the cause of action’s title and instead viewed its substance.

Plaintiff’s contract claim really sought rescission – she wanted her half a million in earnest money back.  Since rescission is an equitable remedy, a jury trial isn’t allowed.  (*5).  The fact that the plaintiff sought monetary interest didn’t convert her claim from an equitable one to an action at law (for money damages).

Take-away: This case is post-worthy for both its current events and celebrity quotient.  Aside from that, the case serves as a good illustration of a time-honored consumer fraud theory (bait and switch) adapted to a modern-day complex real estate contractual setting.

Goldberg also provides a dramatic example of a court looking beyond a cause of action’s label (breach of contract) and discerning the substantive relief sought (rescission) by a party to determine whether a given claim is legal (and triable to a jury) or equitable (no jury trial) in nature.

Settlement Agreement Construed Like Any Other Contract

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This one naturally resonated with me as I’ve experienced how time-consuming and expensive it is to monitor and enforce a settlement agreement that, in theory, ended the case.

In Sprint Nextel v. AU Electronics, Inc., 2014 WL 2580, the parties executed a written settlement agreement ending litigation involving defendants’ illegal sale of Sprint cell phones.  The agreement required the defendants to make several installment payments in exchange for Sprint dismissing the suit and not enforcing the agreement’s consent judgment term.

A month after the settlement agreement was signed, government agents raided defendants’ corporate offices (as part of a crackdown on cell phone trafficking), took its equipment and slapped a $1,000,000 lien on the corporate bank account.  Convinced that Sprint was behind the raid, the defendants repudiated the settlement agreement and Sprint moved to enforce it.  The Illinois Northern District granted Sprint’s motion.

The Court enforced the settlement agreement under basic contract interpretation rules.

A district court has inherent power to enforce a settlement agreement in a case before it;

–  A settlement agreement is a contract and state contract law governs the construction and enforcement of a settlement agreement;

– The terms of a settlement are based on the parties’ intent derived from the objective language of the agreement terms;

– A settlement agreement is effective when arrived at unless the parties specify that it’s subject to contingencies.

– A binding contract must contain an offer, acceptance and consideration and a meeting of the minds on all material term;

– Consideration means “bargained-for exchange” – where the promisor receives a benefit in exchange for his promise;

A “meeting of the minds” is based on the parties’ objective manifestations of intent;

–  A “material term” is one so essential to the contract that it wouldn’t have been made without itSprint, *4-5.

Here, all contract elements were present: the settlement agreement clearly delineated the parties obligations, it recited consideration and was signed by the defendants.  Consideration existed too:  Sprint agreed to dismiss the suit and forbear from executing on the judgment as long as defendants made the payments.  Sprint also established defendants’ breach (the repudiation of the settlement) and damages – defendants’ refusal to comply with the settlement meant that Sprint would now have to spend more time and money litigating the case and would not receive the installment payments.

The defendants’ tried to defeat the settlement agreement under rescission and commercial frustration theories.  The Court rejected both arguments.  Defendants’ rescission attempt was based on Sprint’s supposed breached of the agreement’s confidentiality/non-disclosure provisions.  The Court nixed this argument because the non-disclosure provision wasn’t a material term of the settlement agreement.

Under Illinois law, only a material breach will merit rescinding a contract.  Sprint, *9.  Here the material terms were simple: (a) Sprint dismisses the suit; and (b) defendants make payments.  The non-disclosure term was viewed as collateral to the agreement’s main purpose.

The Court also rejected defendants’ commercial frustration defense.  A sparingly used doctrine, a commercial frustration defense requires a showing that (1) the frustrating event was not reasonably foreseeable, and (2) the value of counter-performance has been totally or nearly totally lost or destroyed by the frustrating event.

The Court labeled the commercial frustration test as “rigorous” and “demanding.”  The Court held that the government’s raid on the corporate defendant’s office was reasonably foreseeable given that defendants were involved in a criminal enterprise and under investigation by state and Federal authorities.  Also, the defendants’ performance of the settlement terms wasn’t completely foreclosed.  The individual defendants’ bank accounts were not frozen by the government.  This made it possible for defendants to perform under the settlement agreement by paying the installments to Sprint.

Afterword: Monitoring compliance with and enforcing settlement agreements often leads to protracted, “satellite” litigation.  It can be tedious and demoralizing to realize that you are spending more energy (and money) babysitting and litigating the settlement than you did in the underlying case!  The Sprint case, in back-to-basics fashion, shows that settlement agreements are enforced like any other contract.

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